In the event you are faced with dissolution of marriage, it is important to understand the many tax implications of divorce. Couples will be required to divide assets, establish separate households, and will incur legal costs. Parents must determine custody and child support requirements. The tax law covers these situations.
Legal Fees and court costs are generally allowed as an itemized deduction only when connected to the production of taxable income. It is non-deductible when related to divorce, custody, or support proceedings.
When Property Settlements are used to divide property between divorcing couples, there is no sale, gain or loss at that time. Appreciated property transferred to the receiving spouse retains its prior cost basis. Cash presents no issue because there are no gains.
However, when transferring real estate or investments, some downstream effects should be considered. A future tax liability may now rest solely in the hands of the recipient related to built-in real estate or stock market gains. Further, the reduction of the home gain exclusion and real estate commissions and closing costs may also reduce the realizable value of the asset.
If an Alimony agreement was executed on or before December 31, 2018, the alimony payments are a deductible expense and are taxable to the recipient. After December 31, 2018, the alimony payments are neither deductible, nor taxable to the recipient.
Child Support is not a deductible expense, and not taxable to the recipient.
The Filing Status of both spouses will generally change at the end of the year in which divorce is final, for example from Married Filing Jointly to Single. However, a custodial parent may qualify for Head of Household. Also, you may or may not retain the right to claim your children as dependents.
There are numerous rules governing how divorcing couples and parents should split expenses and tax benefits. Before a life event occurs, ask your tax accountant for help to evaluate how the tax implications of divorce can affect you.